Independent Legal Advice

What is it? Why is it so important and why do banks insist upon it?

What is Independent Legal Advice?

Often, people are surprised to hear they need independent legal advice (ILA), particularly if the subject matter is one of common agreement.

However, independent advice is necessary in any matter that actually or potentially affects the rights or liability of someone other than the person undertaking the main transaction. The principal aims of ILA is to ensure that signatories understand the nature of the document they have been asked to sign and are entering into the document with informed consent and without any undue influence or pressure.

Why do banks insist on ILA?

The requirement for ILA stems from the Etridge case.(House of Lords – Royal Bank of Scotland v. Etridge (AP)  

Facts of the Etridge Case

Etridge involved a wife claiming that she had charged her interest in the matrimonial home as a result of undue influence from her husband. The matrimonial home was charged to secure loans used by the husband for his business and the wife had no direct benefit from the charge. The husband’s business failed and the bank sought to repossess the matrimonial home. The wife claimed to have been unduly influenced by her husband to sign the security agreement and therefore she wanted the security agreement to be declared void to prevent her home from being repossessed.

Court decision

The House of Lords determined that the bank was obliged to make sure that signatories to its security documents obtain independent legal advice, especially if, in the case of a couple transacting for security over their matrimonial home, the loan would only benefit one person. The bank is “put on inquiry” to watch out for undue influence or misrepresentation in such cases. A bank will be able to repossess the property the loan was secured against, but it must prove that the signatory obtained ILA and gave informed consent to granting the security.

Consequently, banks insist that where a third party (e.g. a wife, husband, individual director etc) of the actual borrower provides security or a guarantee, then that individual must take ILA. The ILA must be provided by a solicitor who is independent of the underlying legal transaction. That solicitor is obliged to meet the signatory in private and must explain the implications of entering into the security or guarantee documentation. The independent solicitor will be required to confirm in writing to the bank that ILA,  in a manner and form acceptable to the bank,  has been provided, and banks will only release funds once they have the necessary ILA confirmation.

Does ILA only protect the banks?

Not at all. Whilst the requirement for ILA is primarily to protect the bank’s position, it is also imperative for the security or guarantee provider to be fully aware of the contents of the document they are being asked to sign and the personal risks to them and their estate in the event of a default by a third party over whom they may not have any control. These risks can include losing one’s home, savings or personal assets to the bank. The solicitor providing the ILA will explain the risks and signatories will have the opportunity to discuss any concerns they may have.

When might an ILA be required?

1. When acting as a personal guarantor
2. When providing a personal guarantee as a director for the companies’ borrowing
3. When an occupier needs to consent to the grant of a mortgage over their residential home

How can Keelys LLP help?

We have a team of lawyers who can provide the necessary ILA and comply with the requirements of any bank in a timely fashion and at a fixed cost. Please contact Jas Virk of Keelys to discuss your ILA requirements.

Jas Virk, Partner at Lichfield based law firm, Keelys LLP, 01543 420000